A closer look at Comcast Corporation’s uninspiring ROE (NASDAQ: CMCS.A)
Many investors are still educating themselves on the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about Return on Equity (ROE). We’ll use ROE to take a look at Comcast Corporation (NASDAQ: CMCS.A), using a real-world example.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for Comcast
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Comcast’s ROE is:
13% = US $ 12B ÷ US $ 97B (Based on the last twelve months to June 2021).
The “return” is the amount earned after tax over the past twelve months. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.13.
Does Comcast have a good ROE?
A simple way to determine if a company has a good return on equity is to compare it to the average in its industry. However, this method is only useful as a rough check, as companies differ a bit within the same industry classification. As shown in the image below, Comcast has a lower than average ROE (17%) for the media industry.
Unfortunately, this is suboptimal. However, a low ROE is not always bad. If the company’s debt levels are moderate to low, there is still a chance that returns can be improved through the use of financial leverage. A company with a high level of debt and a low ROE is a combination that we like to avoid given the risk involved. To learn about the 3 risks we have identified for Comcast visit our free risk dashboard.
What is the impact of debt on return on equity?
Businesses generally need to invest money to increase their profits. The money for the investment can come from the profits of the previous year (retained earnings), from the issuance of new shares or from loans. In the first and second cases, the ROE will reflect this use of cash for investing in the business. In the latter case, the debt used for growth will improve returns, but will not affect total equity. So, using debt can improve ROE, but with added risk in stormy weather, metaphorically speaking.
Comcast’s debt and its 13% ROE
Noteworthy is Comcast’s high reliance on debt, which earned it a debt-to-equity ratio of 1.07. While his ROE is quite respectable, the amount of debt the company currently carries is not ideal. Debt comes with additional risk, so it’s only really worth it when a business is making decent returns from it.
Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. In our books, the highest quality companies have a high return on equity, despite low leverage. All other things being equal, a higher ROE is preferable.
But when a company is of high quality, the market often offers it up to a price that reflects that. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in the current price, should also be considered. So I think it’s worth checking this out free analyst forecast report for the company.
Sure, you might find a fantastic investment looking elsewhere. So take a look at this free list of interesting companies.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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